Credit Clinic – Part 7

Experian expert, Joe Green, answers your credit-related questions

Minimum payments
I recently heard that, if you only make the minimum repayments on your credit card, it can affect your credit score. I currently only make the minimum payments each month on my two credit cards, as a first time buyer, will this affect my ability to get a mortgage?Ollie Garnett

When you have a credit card, your main priority should be to stay within your credit limit and to make at least the minimum repayment every month. If you have any late or missed payments on either of your credit cards in the past six years, this is likely to impact your credit score, meaning that any credit you do apply for and manage to get might cost you more money. Credit card providers actually share a little more information than other lenders, through credit reference agencies like Experian. This can include details of whether or not you are making just the minimum repayment each month. If you do this on a regular basis, it could, combined with other information, suggest you might be struggling with your finances – unless you were benefitting from a cheap promotional interest rate, in which case, making the minimum payment is not seen as a warning sign. So it’s worth bearing this in mind.

In the run-up to you applying for a mortgage, it could be worth, if you can, trying to pay down your balances as low as possible, as some lenders look at how much you are using of the credit you have available. Using no more than 50% of your credit limit could help – certainly try to avoid maxing out any single account.

How many searches?
I am saving up for a deposit on my first home, and I want to get the best available mortgage deal possible. However, I have been told that too many searches on my credit report can impact my credit score, so how do I get the best deal possible without affecting my credit score?Nick Richardson

Too many searches on your credit report can affect your credit score, but it’s only searches created by applications for credit that lenders are interested in. Every time you make an application for credit, the lender will usually carry out a full credit check, which will leave a ‘footprint’ visible to other lenders. One or two footprints are unlikely to cause you problems, but a rush of recent credit report searches may worry prospective lenders as this is often a sign of financial stress, or even fraud. The effect of any footprint on your credit report is usually very short-lived as lenders are generally only interested in recent applications. After 12 months, they drop off your credit report altogether, but some credit reference agencies will retain them for two years. To avoid any visible footprints being registered on your credit report, it’s important to find the best deals suitable for you, using price comparison websites. Many lenders will be able to give you a credit quotation, which will give you an indication of whether you may be accepted and, if they need to check your credit report to provide this, the footprint this leaves behind won’t affect your credit score. An agreement in principle will leave a hard search, which other lenders will be able to see on your credit report – so it’s important to be aware of this.

Payday Loan
I recently had a payday loan to help cover the costs of Christmas. Does this type of borrowing show up on my credit report? Will it affect it negatively as it’s a subprime loan?Laura Shawbell

Taking out a payday loan to cover the cost of Christmas is certainly not uncommon, even if it could be a very expensive way of borrowing over the festive period. If you have repaid your payday loan on time and in full, then any effect on your credit score might even be positive. This is because many payday and other short-term loan providers regularly share customer records with all three credit reference agencies. Importantly, when lenders check your credit report they are looking for evidence that you are a responsible borrower. Each lender’s own assessments will be based on how its past customers, who had used short-term credit when they made their applications, went on to behave. You may be worried about speculation in the press on whether customers who’ve used payday and short-term loans are being refused mortgages, but the truth is, each lender will assess your credit history using its own criteria. While some may see a successfully settled and well-managed payday loan as a positive, there may be some lenders that might disagree. However, many lenders won’t differentiate between these and other forms of credit, provided you have managed them properly.

It’s important that you make sure you continue to manage all your credit accounts sensibly, making payments on time and keeping within the agreed limits. If you can, it’s also sensible to try to refrain from applying for any other credit in the months leading up to your mortgage application. Taking all of this into consideration could be the key to a successful application.

Before committing to a mortgage deal, you need to get yourself in the best possible position, so take some time to understand your current position by checking your credit report, and then you can start taking some steps to ensure it is in the best shape to support your mortgage application.